Several weeks ago, a gentleman that we know (no, this is not an Eliot Spitzer story), mentioned to us that he was looking to re-source a number of different assemblies that he currently has in China, hopefully to Mexico. The assemblies are fabricated parts, quite heavy by weight, powder coated with some welds. It’s a classic mid-market assembly….relatively low volume (less than 10,000 assemblies annually), high individual dollar value but low aggregate value (a couple of hundred thousand dollars). The gentleman, leading the effort at the company, shared his frustration over not identifying a single source in Mexico that was remotely competitive. How uncompetitive were the Mexican sources? Nearly double the delivered costs from China!
How odd, I thought. In theory, given the VAT rebate changes in China, the new export tariffs, currency exchange rates (now 15% higher), ocean freight etc., now ought to be a good time to take a look at developing at least an alternative source. And so we took a look too. Here is what we learned. Like our colleague, we identified smaller fabricators who would be interested in the volume but who were also extremely qualified with good experience working with American buyers. And, like our colleague, the prices coming in were also nearly double that of the Chinese. But how could that be? Yes, labor rates are higher (but the difference is not as large as one might expect). According to the CIA world fact book, Mexican labor rates are approximately $3.28/hour whereas Chinese labor rates are $1.27/hour. Yes a big difference, but not when you look at American labor rates in comparison. But this is clearly an advantage for China.
Freight is a no-brainer. It’s much cheaper to bring in a truckload of parts from Mexico than China. The inventory carry cost is also much lower since the supply chain is so much shorter. This is clearly an advantage for Mexico.
Given the VAT changes, export rebate changes and the further decline of the American dollar against the RMB, I would have expected Mexico to come out only 10-15% higher. So what gives?
I would contend there are two issues at play. The first involves an interesting pricing dynamic for raw materials. A fabricator in Mexico can not buy HRPO coil for the same price as his counterpart can in the US. In fact, the Mexicans often pay up to $150 more per ton! When you have a heavy part or assembly that requires steel, you could be at a real disadvantage out of Mexico. The second issue involves the whole notion of margin. Whereas a Chinese fabricator may work on as little as an 8% margin, most Mexican fabricators wouldn’t consider a margin less than 25%. When you add these two factors together, you can see how Mexico is not readily competing with China. But that is fabrication and I’m specifically talking about steel.
If you have a machined part or a stamping or something not made of steel, try Mexico on for size. No hay una problema. And drop us a line and let us know what you were able to source from Mexico! Send email to [firstname.lastname@example.org]